Stress Testing in a Structural Model of Bank Behavior
Pablo D'Erasmo (),
Alfonso Irarrazabal and
P. Dean Corbae ()
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Alfonso Irarrazabal: BI Norwegian Business School
No 1315, 2016 Meeting Papers from Society for Economic Dynamics
We develop a structural banking model for microprudential stress testing. We model a single bank that optimally chooses portfolio allocation, dividend policy and exit, facing regulatory and technological constraints. In our calibrated model, the bank has an incentive to hold a buffer stock of capital even in excess of regulatory requirements to protect its charter value. We explore optimal behavior during severe macroeconomic stress. We employ bankâ€™s endogenous exit choice as a novel metric for counterfactual stress outcomes. Finally, we discuss implications for current stress testing framework.
New Economics Papers: this item is included in nep-ban and nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1315
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